Commercial Real Estate Activity Continuing To Decline

A sustained lack of credit and the economic slump will depress the commercial real estate market this year, according to a forward-looking index and forecast for the commercial real estate sectors published by the National Association of Realtors®.

Lawrence Yun, NAR chief economist, said all components of the index declined. “The credit crunch has especially hammered down some components of NAR’s commercial leading indicator,” he said. “A lack of commercial credit is a serious threat to the overall economy. The Federal Reserve needs to use the Term Asset-Backed Securities Loan Facility (TALF) to provide liquidity and support for commercial mortgage-backed securities.”

The Commercial Leading Indicator for Brokerage Activity1 fell 6.0 percent to an index of 109.2 in the fourth quarter from a downwardly revised reading of 116.1 in the third quarter, and is 9.1 percent lower than an index of 120.1 in the fourth quarter of 2007. NAR’s track of the commercial leading indicator dates back to 1990.

The slowing index means commercial real estate activity, as measured by net absorption and the completion of new commercial buildings, is likely to weaken further over the next six to nine months.

The Society of Industrial and Office Realtors®, in its SIOR Commercial Real Estate Index, a separate attitudinal survey of 644 local market experts, also expect a lower level of business activity in upcoming quarters. Ninety percent of respondents indicate leasing activity in their market is down, and vacancy rates are generally higher.

Given the freeze in commercial credit, investment activity in commercial real estate sectors has essentially halted, while continuing job losses are reducing the demand for space.

Realtors® Commercial Alliance Committee chair Robert Toothaker said all sectors are down except for multifamily. “The apartment rental market is more stable simply because home sales are depressed,” he said.

“The stimulus package is designed to create jobs, and that would eventually lead to an upturn in the commercial market,” Toothaker said. “However, we need to quickly restore liquidity to commercial real estate lending so transactions can move forward and debt on existing properties can be rolled over.”

The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data were provided by Torto Wheaton Research.

Office Market

Losses in the job market continue to reduce demand for office space. Vacancy rates are projected to increase to 16.7 percent in the third quarter of 2009 from 13.4 percent in the third quarter of 2008.

Annual rent in the office sector is expected to decline 4.2 percent this year following a 0.4 percent dip in 2008. In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is seen as a negative 77.4 million square feet in 2009.

Industrial Market

The industrial sector is now beginning to feel the impact of the global economic slowdown, which is reducing the demand for exports. Vacancy rates in the industrial sector are forecast to rise to 12.2 percent in the third quarter of 2009 from 10.7 percent in the third quarter of last year.

Annual rent is estimated to fall 4.1 percent this year, after declining 0.8 percent in 2008. Net absorption of industrial space in 58 markets tracked should be a negative 148.1 million square feet this year. Because much of recent construction has been built to suit specific needs, many obsolete structures are on the market.

Retail Market

The slowdown in consumer spending has hit retailers hard. The retail vacancy rate will probably rise to 13.4 percent in the third quarter of this year from 9.8 percent in the third quarter of 2008. Average retail rent is expected to fall 9.0 percent this year; it declined 2.0 percent in 2008. Net absorption of retail space in 53 tracked markets will likely to be a negative 49.8 million square feet this year.

Multifamily Market

The apartment rental market – multifamily housing – has held its own as a result of depressed home sales as potential buyers seek rental housing. Multifamily vacancy rates are forecast to edge up to 6.0 percent in third quarter of this year from 5.8 percent in the third quarter of 2008.

Average rent is projected to grow 1.7 percent this year, following a 2.9 percent gain in 2008. Multifamily net absorption should be 127,500 units in 59 tracked metro areas in 2009.

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